A Long-Term Fix for Long-Term Unemployment

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The gaps in the U.S. social safety net are about to become very large holes. For the past several years, lawmakers have repeatedly voted to extend unemployment insurance benefits, most recently in February. But in many states those benefits are running out, leaving the long-term unemployed with choices that range from bad to awful.

This moment was inevitable, and should compel Washington to re-think how it supports jobless workers. As my colleague Matthew Slaughter, a former member of the White House Council of Economic Advisers, has explained, the current unemployment insurance system was designed in the 1930s and has remained largely unchanged. It is premised on the idea that unemployment is the consequence of cyclical downturns, and that government’s role is to provide short-term support during recessions for workers who will likely be rehired in the same industries (and usually by the same employer) when the economy recovers.

That system has been inadequate for some time in the face of more intense global competition and faster technological change that has left more workers without the skills they need to find new jobs. The Pew Fiscal Analysis Initiative recently charted historical long-term unemployment (those out of work a year or more). The chart below shows that the problem had already become somewhat bigger over the past thirty years, with the numbers of long-term unemployed remaining higher for longer after each recession. But it really spiked following the recession in 2008-2009, sending the numbers up to record levels of more than 30 percent of all unemployed.

The biggest problem for the unemployed remains sluggish growth and lack of demand. For every available job, there are still more than four unemployed workers, and that gap will not shrink unless the economy grows faster. But the current system does very little to help the long-term unemployed prepare for those positions that are open. There are currently some 3.7 million jobs openings in the United States, a number that has increased steadily since the official end of the recession in 2009.

Both critics and supporters of unemployment insurance are in agreement that the program should do more to retrain workers for those jobs. Slaughter and Harvard University economist Robert Lawrence have argued for replacing the current unemployment insurance scheme with an “American Adjustment Program” that would bring together the current unemployment insurance program with elements of the Trade Adjustment Assistance program and current job training programs.

Their scheme, which was laid out in greater detail in work done with former Bush trade official Grant Aldonas, has four main components:

• A “training stipend” that would be available to every unemployed worker to help cover the cost of retraining.
• Tax deductibility both for companies and individuals that invest in retraining.
• Continued health insurance for all unemployed workers.
• A “wage loss insurance” program that would encourage older workers to find new jobs at lower wages by replacing up to 50 percent of their lost wage income for two years.

The obvious objection to such a program is the cost, but by any reasonable measure it is surprisingly affordable. They estimate the annual additional cost at $22 billion; spending on the current unemployment insurance program is expected to be $99 billion in FY2012, and hit $159 billion in FY2010. The additional proposed spending is small, and looks smaller still if we take into account the big losses to the economy from long-term unemployment, losses felt through reduced incomes, lower productivity, and shrunken output.

Further, they propose a simple, logical way to fund the scheme – replace the current regressive payroll tax in which lower paid workers proportionately bear a much greater burden with a flat assessment of roughly 1.3 percent on all wages. That would be a fairer payroll tax that would actually reduce taxes for lower-wage workers.

With the possible exception of wage loss insurance, which remains controversial, none of this should be all that difficult politically. Liberals would welcome the additional support for unemployed workers, and the scheme would address conservative worries that unemployment insurance discourages people from returning to work. With the political appetite for another short-term fix waning, it is time for a longer term solution.

Opinions expressed on CFR blogs are solely those of the author or commenter, not of CFR, which takes no institutional positions.

Retraining is fine, but jobs must still exist for the retrained to be hired. And those jobs must offer reasonable wages. This recession is really about making the workforce competitive in a global market.

Low paying jobs won’t solve the problem. What is needed is an industrial and corporate environment that encourages high wage jobs to remain onshore. Retraining to compete with software developers in Bangalore isn’t the answer.

The other problem is that many higher paying jobs – including development, marketing, manufacturing and even legal and finance – are being located where the growth markets are. Features are being developed to meet local market needs and manufacturing is being done locally to minimize transportation csts as well as direct manufacturing costs. If the US market isn’t growing it’s not surprising that these jobs are no loner onshore.

It appears that one answer is for companies to create new markets where none previously existed, Apple’s iPad and iPhone are good examples. This takes vision and requires risk – things that the US has traditionally good at, however we seem to have forgotten. Now CEOs seem to be more interested in personal gain than in growing companies and industries.

The other answer is to develop technologies that are new and useful. Making a slightly better band aid is not sufficient, developing the next generation of batteries would be.

One often hears the argument made – by politicans and CEOs alike – that there are thousands of jobs available in the U.S. but which companies are unable to fill because of the ‘ill-educated’ and incapable American workforce – a theory that seems to fly in the face of HPs layoffs which will include thousands of highly educated engineers who (obviously) come to the population of unemployed American workers complete with post-secondary education and experience in the STEM sciences. Nobody’s talking about the millions of college educated, yet long-term unemployed population of ‘STEM’ workers in the U.S., yet many in the media can’t praise the efforts to expand ‘immigrant visas’ in the name of ‘entrepreneuial spirit’ loud enough.

No one argues that there are very bright and well-educated immigrant workers and students, but the fact is that literally millions – maybe tens of millions – of Americans workers were fully and 100% ‘employable’, highly educated and very much value-added contributors to not only their employers, but to the economy as a whole, but who remain unemployed – often after years of searching. Many millions of these long-term unemployed Americans are now deemed ‘unemployable’ – and the politicians and corporate CEOs, with help from the corporate media outlets, have succeeded in making the unemployed the scapegoats who now, ‘all of a sudden’ (as a result of the Great Recession), are no longer ‘employable’ and are instead part of the ‘ill-educated and incapable’ American workforce who cannot fill any of the so-called high-paying (living wage) jobs.

What happened over the course of just two or three years? Certainly it isn’t the case that millions of once-hard-working, successful middle class Americans became ‘ill-educated, incapable, and unemployable’, causing members of Congress to call for additional immigration visas in a ‘bi-partisan’ effort to boost entrepreneurship and job creation – especially at a time when one of America’s largest technology companies is set to gut its workforce – a workforce full of American engineers?

Adding insult to injury, hundreds of thousands in California and across the country are continuing to lose their only lifeline: unemployment insurance benefits. This is the ‘job creation’ strategy that American presidential hopeful Mitt Romney – and members of Congress – want to pursue during this extended period of unprecedented long term unemployment?

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The United States faces enormous challenges created by an increasingly dynamic and competitive global economy. This blog offers a portal to the Renewing America initiative, which sponsors research, analysis, policy ideas, and dialogue on how best to revitalize the country's economic strength and build the foundations for future prosperity and influence.